Apollo Group Inc. (NASDAQ: APOL) is showing some more negative news in the fields of online education and for-profit education. The company submitted and SEC filing on Monday showing that its University of Phoenix subsidiary received a notice of Probation from The Higher Learning Commission on February 22. This is a commission member of the North Central Association of Colleges and Schools regarding the ongoing accreditation reaffirmation review of the University.

HLC is the university’s institutional accreditor and the end result is that the peer review team determined that the University of Phoenix is not in compliance with Criterion One of the Criteria for Accreditation, Core Component 1d, and certain of the related Minimum Expectations. These points all relate to the university’s administrative structure and governance.

The team has now recommended that HLC place the University on Probation status as the University of Phoenix has insufficient autonomy in relation to its parent (Apollo Group) as far as its board of directors management independence.

Some good news was included: the team found that University of Phoenix was in compliance with substantially all other Criteria of Accreditation, including the criteria associated with academic matters and student services, and, with one recommendation of a follow up report, all the applicable Federal Compliance Program Components. It was also noted that this team “specifically noted that the University is well resourced and innovative and has many strengths, including a high level of relevant student services and technology and systems that benefit students and provide a consistent approach to facilitate learning across its programs and facilities.”

Some of this data had been telegraphed by the company before but on a lesser scale. It previously disclosed in January that the HLC had informed University of Phoenix that the draft review report would include a recommendation that the University be placed on Notice status. The problem is that this “Probation” is worse than the “Notice” status. Apollo said in the filing that the HLC did not explain why the recommendation changed from Notice to Probation.

The University of Phoenix did say that it intends to challenge and appeal this formal Probation recommendation while it works with HLC to reach an agreement on an appropriate governance model. The draft report also identified other areas of concern which will require future reporting and follow-up activities by the University. While those were not said to be the basis of the Probation, these include retention and graduation rates, sufficiency of Ph.D program faculty research activity, the reliance on federal student financial aid, assessment of student learning; and documenting credit hour policies and practices with regard to learning outcomes of learning teams.

Here is the problem for the university and for Apollo:

If the Probation recommendation is approved, the draft report recommends a probationary period through the Fall of 2014, with the requirement that University of Phoenix submit a probation report at that time demonstrating that the specified matters have been ameliorated. In addition, the draft report also recommends that University of Phoenix be required to submit within three months of any final decision by the HLC Board of Trustees with regard to the initial recommendation of Probation a plan delineating the manner in which it will achieve compliance with the specified conditions.

Apollo’s SEC filing also showed that its Western International University received from the review team a finding that this subsidiary is not in compliance with three of the Criteria for Accreditation, including governance. It recommended that Western International University be placed on Probation status as well.

The company warned,

If, after completing the review and appeal of the team and IACFC recommendations, HLC elects to impose the sanction of Probation, the reputation of University of Phoenix and/or WIU, as the case may be, could be adversely affected, which in turn may negatively impact their ability to recruit and enroll students and to recruit and retain faculty and staff. To the extent that the sanctions have this effect, our business could be materially and adversely affected. We intend to work vigorously and closely with HLC to address their concerns in due course, and the HLC peer review team for the University of Phoenix has indicated in its draft report that it is confident that its concerns can be successfully addressed by the University. However, if University of Phoenix should lose its institutional accreditation, our business would be substantially impaired and we would not be able to continue our business as it is presently conducted.

Apollo Group’s shares closed down 4% at $17.83 on the day at what was already a 52-week low as the prior range in the last year has been $18.36 to $52.05. Its market cap at the close was $2.01 billion and shares were indicated down about 2% more at about $17.50 in the after-hours trading session.

Investors need to know that Apollo is the leader of the for-profit sector of education. It has been a constant and deliberate target of attacks and the current climate of education under the “for-profit” status has been under attack.

For the for-profit education sector to compete and win in the world of education, it has a simple goal that will be difficult to overcome. The for-profit education sector needs to be able to offer the same education or better education at a better price and it needs to be able to get to the point that its placement rates and after graduation are close to the same as the non-profit education.

We would bring up a serious point here that will sound very sarcastic but it not sarcastic at all. If you pay for your education or that of your kids, or if you go take out a student loan… Does it feel like your non-profit university or college is not really out for a profit? That is what has been missing from the online and for-profit universities in their fight for relevance.

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